Should I Buy Nike? 3 Pros, 3 Cons

by Tom Taulli | March 25, 2013 2:55 pm

Should I Buy Nike? 3 Pros, 3 Cons

Last Friday, Nike’s (NYSE:NKE[1]) stock soared double-digits, as the company showed that it can still “just do it.”

In the third quarter, Nike grew earnings by an impressive 16%, while sales gained over 9%. That made for an EPS of 73 cents on revenue of $6.19 billion, besting expectations for an EPS of 67 cents on revenue of $6.23 billion.

On top of that, the company’s gross margin improved for the first time in nine quarters and Nike added a sales forecast for 2014 in the mid-single digits, along with adjusted EPS growth in the mid-teens — both in line with the consensus estimate.

That stock’s subsequent gain was the largest in over four years and sent shares to a new 52-week high.

So, is that gain a good sign for investors, or does it make the stock too pricey? To see, let’s take a look at the pros and cons:

Pros

The Brand. Celebrity endorsements are not cheap — but they can be a tremendous way to differentiate a company. Of course, this has been the case with Nike. Just some of its athletes include Tiger Woods, Kobe Bryant, LeBron James, Blake Griffin, Ray Rice and Maria Sharapova. As a result, Nike has been able to maintain its mega brand, which has helped it to create pricing power. The company has also been able to fight back fierce competition from rivals like Adidas (PINK:ADDYY[2]) and Under Armour (NYSE:UA[3]). Plus, Nike also has other notable brands, so as to cater to different market segments. These include Converse, Hurley and Jordan.

Innovation. On the earnings conference call, Nike’s CEO Mark Parker called himself an “unabashed product geek.”  No doubt, this has been a good thing for the company. For example, Nike has gotten lots of traction from its Flyknit technology, which uses state-of-the-art engineering to weave yarns and fabrics for a featherweight, formfitting shoe. Then there is the Nike Pro Combat Hypercool, which has sweat-wicking fabric and much improved ventilation.

E-Commerce. On the earnings call, Parker noted that the online business saw a 33% increase in revenues — and that growth should continue for some time. A key driver is likely to be NikeFuel, which is a wrist band that tracks a person’s activity. It is hooked to an online community and various mobile devices, such as the Apple (NASDAQ:AAPL[4]) iPhone. NikeFuel has the potential to create an engaging social network for fitness, which could lead to more and more online transaction.

Cons

China. Over the past year, the country has been a drag on results. Of course, Nike was able to improve the situation in the latest quarter, with order growth of 4%. Still, on the conference call, Nike’s CFO Don Blair was quite cautious. China could be a problem because of the uneven growth and the intense competition.

Other Emerging Markets. There is definitely a lot of opportunity in China and other emerging markets, but success in any will be far from easy. Even though there will continue to be a general increase in wealth, it will remain impossible for many consumers to pay the high prices for Nike products. And while the company could create lower-priced items, that’s dangerous because it could diminish Nike’s premium brand.

Valuation. With the run-up, Nike sure isn’t cheap. It sports a forward P/E ratio of 19, compared to ADDYY’s forward P/E of 15, for example. So if there is a slowdown — which could easily happen in China or Europe — the stock could be vulnerable.  Besides, the dividend is a meager 1.4%.

Verdict

When it comes to apparel, it is not easy to maintain the relevance of a brand … but Nike has been doing so for nearly 50 years.

Still, with the recent spike in the stock, the valuation is a bit pricey. Plus, Nike could easily hit some headwinds from China, and other emerging markets … not to mention Europe.

So, at least in the short-run, it looks like the stock is fairly valued at best and the upside could be limited. In other words, the cons outweigh the pros at this point.

Tom Taulli runs the InvestorPlace blog IPO Playbook[5]. He is also the author of “How to Create the Next Facebook[6]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[7].”Follow him on Twitter at @ttaulli[8]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. NKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NKE
  2. ADDYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADDYY
  3. UA: http://studio-5.financialcontent.com/investplace/quote?Symbol=UA
  4. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  5. IPO Playbook: http://investorplace.com/ipo-playbook/
  6. How to Create the Next Facebook: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846
  7. High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders: http://goo.gl/pR2F3
  8. @ttaulli: https://twitter.com/ttaulli

Source URL: http://investorplace.com/2013/03/should-i-buy-nike-3-pros-3-cons-2/
Short URL: http://invstplc.com/1nwE4br